Daily Newsletter, Saturday, 4/6/2019

Table of Contents

Market Wrap

Inch by Inch

by Jim Brown

The equity market is slowly climbing the wall of worry towards the prior highs.

Weekly Statistics

Friday Statistics

The progress is "inch worm" slow with a steady rise, pause, repeat rhythm. Fortunately, the pauses have been minimal. The S&P actually managed to string together seven consecutive days of gains and the longest streak in 18 months. The index closed only about 37 points from its record high.

The Dow lagged the broader market on Friday but still managed to post a minor gain. The index is only about 192 points below the record high set in January 2018 before the market sank for the next seven months. This 26,616 level could be the left shoulder of a head and shoulders pattern if the index suddenly rolled over. While I am not expecting that, it remains a possibility.

The market waited patiently all week on worries over the Nonfarm Payrolls on Friday. Would they be a repeat of the 20,000 jobs in February or return to normal around 200,000? Fortunately, they returned to normal and proved the February number was a fluke.

The report showed a gain of 196,000 jobs in March and February was revised up slightly to 33,000. We still do not know what caused the abnormal reading, but it should not matter now. There will be another revision next month, but I doubt it will move much. The second revision is normally small. The first quarter average was 180,000 thanks to the +312,000 reading in January.

The unemployment rate was flat at 3.8% and participation rate declined slightly from 63.2% to 63.0%. The labor force declined by -224,000 and the third monthly decline after four months of huge gains. Average hourly earnings rose 4 cents to $27.70 increasing the year over year wage growth to 3.2%.

The weekly unemployment claims on Thursday fell to 202,000 and a 49-year low. This is another indication that employment is still strong with fewer people filing for unemployment.

The markets breathed a sigh of relief and opened sharply higher. For the Dow that was the high for the day.

Consumer credit for February was the only other report of note. The headline number of $15.2 billion was slightly less than the $17.0 billion consensus. January was revised higher to $17.7 billion. Credit typically declines into May and then increases over the summer months.

Revolving credit rose $3 billion and slightly higher than the $2.6 billion increase in January. Nonrevolving balanced rose $12.2 billion but less than the $15.1 billion increase in January. Nonrevolving balances have not declined since April 2011. Due to rising defaults on auto and credit card loans, banks have been tightening credit standards since early Q4. The growth of balances will slow as the availability of easy money dries up.

The economic calendar for next week has the inflation indexes with CPI and PPI. Neither are expected to show any material increase. Any increases are likely to be driven by the rising price of oil and gasoline. Oil prices have risen $20 or 47% since the late December low at $43. That will impact the price indexes.

The FOMC minutes on Wednesday will command attention especially with the Fed's flip flop on rate policy. Chairman Powell will speak on the economy at the House of Representatives Democratic Caucus retreat in Virginia. The times have not been released but the speeches will be of high interest.

Last but definitely not least is the Brexit on Friday. If there are no changes to the timeline this week, the UK will crash out of the EU on Friday in what is called a hard Brexit. Prime Minister May and multiple party heads are trying to come up with a compromise from adding a couple weeks or targeting a June 1st exit or even an exit a year from now. This is not just a moving target but a radically gyrating target, so anything is possible.

Friday starts the Q1 earnings cycle with JP Morgan and Wells Fargo leading the list of the big banks. The rest will report the following week with Goldman Sachs and Citigroup reporting on Monday the 15th.

The current Q1 forecast for earnings growth has fallen to a -2.2% decline. Some 23 companies have already reported and 82.6% have beaten estimates. Revenue is expected to rise 5.0% and 43.5% of those 23 companies have beaten estimates. The current forward PE is 16.6. Six S&P companies report earnings this coming week.

There was only one material earnings report on Friday. Greenbrier (GBX) reported a sharp drop in earnings from $1.02 to 22 cents and missed estimates for 24 cents. Net income fell from $61.64 million to $2.77 million. They guided for Q2 revenue of $658.67 million that beat estimates for $628.73 million. For the full year they guided for earnings of $3.60-$3.80 on revenue of $3.0 billion. Analysts were expecting $3.61 and $3.09 billion. The higher earnings guidance spiked the stock at the open, but the gains were short lived.

On Thursday, Constellation Brands (STZ) reported earnings of $1.84 that beat estimates for $1.72. Revenue of $1.797 billion beat estimates for $1.732 billion. They guided for the full year for earnings of $8.50-$8.80 excluding any impact from their holdings in Canopy Growth (CGC). Analysts were expecting $9.36 but that included Canopy earnings. Beer sales rose 11.6% to $5.202 billion. Wine and spirit sales declined -0.2% to $2.914 billion.

The company said it was going to sell about 30 wine brands to Gallo for $1.7 billion. The average selling price for a bottle of the brands being sold was $11. Shares were up sharply on expectations for the Canopy business. The company has 35 patents and 195 patent applications. They plan to launch cannabis beverages in Canada this year. Constellation expects continued losses in its Canopy investment in 2019 but a run rate of $1 billion next year and significant profits in 2020. Shares spiked sharply from $178 to $193.

Deutsche Bank cut them to a hold on Friday. Goldman sees Constellation Brands as well-positioned in high-end beer and expects new flavored malt beverages such as Corona Refresca to contribute to growth.

McDonalds (MCD) was reiterated with an outperform rating at Telsey Advisory Group and the price target was raised from $195 to $210. At the same time McDonalds said it was launching a "simplified" late-night menu starting April 30th that will have only the favorite menu items. The stores have been fighting slow delivery times at night because of the complexity of the menus. The new menu will apply after midnight. The fake food will still be there. The "contains some chicken" nuggets will be on the list. I saw a documentary piece on those a couple weeks ago and I would never let one of my grandkids eat them. Go for the chicken strips instead. Shares closed at a new high.

Intel (INTC) was downgraded from outperform to market perform (buy to hold) by Wells Fargo. The analyst said, "weak semi demand data points in 2019 leave us to consider some downside risk for Intel shares." Intel does have some risk. AMD is making a new 7 nanometer processor that is well positioned compared to Intel's 10 nanometer processors. Intel has still not produced those, but AMD has passed that technical level and is already making the faster 7 nanometer versions. The long-time king of processor chips has been dethroned by a surging AMD.

Goldman Sachs cut Boston Beer (SAM) to a sell saying competition is intensifying in 2019 and the company is unlikely to repeat its innovation success. In 2018 the company had strong sales of its new flavored malt beverages and cider innovations. Competition has a way of copying anything that is successful and without a flurry of new flavors or products, their rise could be short lived. Goldman pointed out that Constellation Brands was launching a new line of flavored malt beverages. They highlighted the Corona Refresca as an example. Shares of SAM fell $16 on the downgrade.

While in this sector, Bank of America raised Anheuser Busch (BUD) from underperform to neutral because of a better debt outlook but said its "mainstream beer" sales are still going flat. The analyst raised the target from $68 to $91. He said the 1.8% organic growth is anemic but steady and dividends are "safe for now." He warned that beer volumes have been weak with increases mostly from M&A activities. The analyst also cited competition from Heineken overseas. Overall global beer volumes have stopped growing over the last five years. BUD controls 82% of volume in the mainstream beer category. Shares rose $1 on the upgrade.

Morgan Stanley upgraded Bed Bath and Beyond from underweight to equal-weight (sell to hold) on Friday with a $20 target. This followed an Citigroup upgrade on Monday from sell to neutral. Citi raised the price target from $11 to $18. The reason for the upgrades is the emergence of activist investors, Legion Partners. The firm has built a 3.4% stake in the company since March 25th and produced a 30% rise in the stock. This has not gone unnoticed with seven analysts upgrading the company over that period. Despite the upgrades only 2 of the 20 analysts covering the stock have it rated a buy. Bears are the largest shareholders with 35% of the stock sold short. This produces a great opportunity for a short squeeze. Legion is trying to replace the entire board and nominated 16 directors. Both co-founders are 80 years old and it is time for some new blood. The lead director is 88.

Align Technology (ALGN) continues to surge after Piper Jaffray reiterated an overweight rating and raised the price target from $250 to $200. Goldman Sachs said in a note that revenue is expected to rise 23% in 2019. Invisible braces are not going away and Align has a lock on this space. Piper Jaffray believes Align is "one of the med-tech world's most compelling growth stories." Earnings are on April 24th and consensus is 83 cents on $529.5 million in revenue.

Facebook (FB) is cursed. The new data breach exposed personal details of more than 540 million members. Everyone including Zuckerberg knows there will be more fines and regulation in the future. Zuckerberg
even wrote an article last week calling for more regulation of the social sites on the internet. Despite the continued privacy issues, Facebook usage is not slowing. Guggenheim upgraded the stock from neutral to buy and raised the price target from $175 to $200. The analyst said Instagram has billions in untapped potential and could add $10 billion in revenue for Facebook by 2021. Of those with a rating 33 of 29 analysts have buy ratings. Shares rose to a new 6-month high on the upgrade.

Amazon (AMZN) rallied to a 5-month high after Jeff and MacKenzie Bezos agreed to an amicable divorce. MacKenzie will keep roughly 4% of Amazon's shares worth $35 billion and that will make her the fourth richest woman in the world. Jeff will keep a 12% stake in Amazon and MacKenzie gave him voting control over her shares, which leaves him firmly in charge of the company. She also gave up her stake in Blue Origin and the Washington Post. With $35 billion in stock, she clearly did not need to battle for the other assets.

The couple met in 1992 while both worked for a hedge fund. Jeff wrote the business plan for Amazon in the car while they were moving to Seattle. MacKenzie was driving. Investors were bracing for a nasty divorce given the tabloid news about his new girlfriend, but it worked out for the best and shares rose.

This shows just how rich Jeff is because after giving $35 billion to his wife he is still the richest person in the world.

Amazon also announced a major wave of price cuts approaching 20% at Whole Foods. Prices on hundreds of items have been slashed. Amazon is trying to create a Costco like following out of the 100 million Prime subscribers by giving them additional discounts. Costco has a 90.7% renewal rate and Prime subscribers are close to 100%. More than 16 analysts have price targets at $2,000 or above with Stifel the highest at $2,500.

Apple (AAPL) shares posted their 8th consecutive gain after news broke that Apple Music now has more subscribers at 28 million than Spotify (SPOT) at 26 million. The eight-day streak is the longest since the record 9-day streak ending Sept-4th 2018.

Apple's new PowerBeats wireless earbuds are said to be even better than the AirPods. Not only is the sound significantly better but they are 23% smaller and 17% lighter than the original version and provide 9 hours of listening on a single charge compared to 5 hours on the AirPods. They are more expensive at $250 compared to AirPods at $159 but Apple users tend to have a higher pain threshold for prices. With revenue from wearables up 50% quarter to quarter and 34% year over year, they are rapidly gaining market share. The prior version of PowerBeats were the top selling fitness headphones in the world. This current model will be even better and help power Apple's non-iPhone revenue.

Let's hope their Q1 earnings does not sour this uptrend.

Boeing shares declined again after the company said it was cutting production of the 737 Max from 52 to 42 planes per month. The prior plan had been to increase production to 57 planes later this year. The 42 planes will be the same level as they produced in 2016 with a rise to 47 planes in 2017 and 52 in 2018. The production cut suggests they do not expect the planes to be recertified in the near future. Originally they were expected to be grounded for two months but now it appears it could be a lot longer. The longer they are grounded the more orders could be cancelled.

In the latest data dump from the black boxes in Ethopia, the crew fought the MCAS anti-stall software, which was trying to push the plane's nose lower. They turned it off and that was the correct procedure but for some unexplained reason they turned it back on and it flew the plane into the ground. The software was being triggered by a defective sensor. It was not the software that was bad but the outside sensor. On the Lion Air plane that crashed, the same thing happened the day before the crash and an experienced pilot riding along in the cockpit told the plane's pilots how to fix the problem and the plane continued on its journey. The next day the same thing happened because of the defective sensor but there was nobody in the cockpit to save the day. In both cases, pilot training in dealing with the nose down issue was at fault.

Oil prices continue to rise as production in Venezuela and Libya was in doubt. Venezuela's production in March fell to 740,000 bpd, a 16-year low due to the country wide blackout and workers walking off the job. Vice President Pence announced a new round of sanctions against 34 PDVSA vessels and two firms that transport oil to nearby Cuba. He alluded that there were more sanctions coming against the financial sector. April 28th is the deadline for non-US entities to wind down their transactions with PDVSA or suffer sanctions by the USA. The 10-day blackout caused many oil facilities to shut down and analysts believe most will not reopen due to lack of workers and money.

OPEC cut 570,000 bpd from its production in March. Compliance to the 1.2 million bpd production cut announced in January rose from 79% in February to 124% in March due mostly to Saudi Arabia's excess cuts.

Libya had the biggest production increase in OPEC as the Sharara field restarted. However, that is likely to be temporary as the country begins a new round of military conflict. The militant Libyan National Army, led by Khakifa Haftar, is marching towards the capital to evict the government leaders and take control.

The turmoil in Venezuela and Libya combined to lift oil prices to $63.34 on Friday. Surprisingly, there was a huge surge in active rigs with 19 rigs going back to work after declining by 41 rigs over the prior five weeks. Was it the sudden breakout of oil prices over $57 that put rigs back to work? There is also the possibility of some event in the fields that kept rigs from moving to new locations after completing a well. There are a dozen potential reasons for the temporary decline in active wells.

Crude prices tend to peak around Memorial Day and then wander in a range until after July 4th when prices start to fade ahead of the end of summer. This suggests we will see prices over $65 soon.

Markets

The S&P is only 37 points away from a new high. There is no material resistance between Friday's close and that 2,930 level. The final 2,872 level has been decisively broken and should now act as support.

The positive comments on the China trade talks plus the rebound in jobs on Friday, have eliminated the last two barriers to further gains. However, it is the unknown events that appear out of the blue that cause the most trouble.

While the new 4-6-week target date for a completed trade deal is far longer than the earlier targets, it managed to move the carrot a little farther into the future and that could keep investors involved that much longer. As long as the commentary remains positive the market could remain positive.

However, once the old high is touched, we could see some volatility appear. With earnings expected to be weak, we could see some investors decide to take profits and move to the sidelines ahead of the summer doldrums.

Friday was relatively calm with only six Dow components moving more than $1 for the day. Boeing was the only loser of more than a buck and erased 18 Dow points but that was minimal. News after the bell that Boeing was going to cut production of the 737 caused the shares to decline another $9 in afterhours. That means Monday's open will have a 63 point drag on the Dow and possibly more since this has been big news over the weekend.

Like the S&P the Dow has moved over the final major resistance before reaching the record high at 26,828. There is some congestion between Friday's close and the high but nothing material. That prior high should be a tractor beam for the index in the days ahead. The January 2018 high of 26,616 could be a temporary problem.

Amazon was by far the leader of the tech sector although Tesla bounced back after the judge gave Elon Musk two more weeks to reach another settlement with the SEC. The tech sector is also nearing a new high with only 71 points separating the index from the record high at 8,109. The FANG stocks have been hit or miss but Apple has been doing the heavy lifting with 8 consecutive gains.

The 8,000 level could be round number resistance but that close to 8,109 it would be hard to tell which number was controlling the move. It would take a material event to keep the Nasdaq from touching that high. With tech earnings still two weeks away, there "should" be nothing in the way unless somebody big drops an earnings warning.

The Russell surged through resistance at 1,566 and the 200-day at 1,574. There is one hurdle left and it is a big one at 1,600. If the small caps can punch through that level the entire market would get a boost.

I am positive on the market given all the broken resistance and the nearness to the historic highs. Those highs tend to pull the indexes up and investors catch the new high fever. I know this is boring, but I have to remind you that sometimes reaching those new high levels can be the equivalent of a dog catching a car. It can be dangerous for the dog. Even if the dog is not crushed, the goal has been achieved and there are no other near-term targets, so he peels away to wander back to his yard. Investors are the same way. Once a big target is reached, they don't know what to do. If there is no obvious target ahead, they lose interest and start to take profits. Nobody can tell you in advance if that will be the case this time, but you should be aware and watch for the sudden appearance of volatility.

Cypress makes chips for the Internet of Things or IoT. That has evolved into automotive uses as well as today's cars are connected to the internet in multiple ways. Self-driving cars obviously have more chips but many cars today function as their own WiFi hotspot for the occupants. I am sure the explosion of IoT devices we have seen over the last several years is just the tip of the iceberg for the years to come.

Shares spiked in early February after the company reported earnings of 35 cents compared to estimates for 33 cents. Revenue of $604.5 million also beat estimates for $599 million.

After several days of gains the stock rolled over with the chip sector in early March. Over the last several days shares have rallied to close at a 6-month high on Friday.

Earnings May 7th.

More than 7,800 of these calls were bought on Friday compared to an open interest of only 257. Somebody is betting a lot that the stock will go up. Because of the cheap price we may hold over earnings unless we have a decent profit to protect before they report. We will NOT hold the stock over the earnings.

In Play Updates and Reviews

Four Week High

by Jim Brown

The Dow may be limping, but the Russell posted a 1% gain. The Russell had a great day with an explosive sprint above resistance at 1,566 and the 200-day at 1,574. The index closed at the high for the day on a Friday. Everyone should be thrilled with this sudden burst of buying when the Dow posted a lackluster 40-point gain. Maybe sentiment is turning now that we are nearing new highs on the S&P.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow.
We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green.
We need to always be prepared for a profit exit at resistance.

Current Position Changes

INO - Inovio
The long position was entered at the open.

If you are looking for a different type of trading strategy, try these newsletters:

Inovio's HPV candidate showed significant progress in tumor restriction. Patients in a trial avoided the regular 6-month resurgence with one going more than two years without tumors returning. Shares closed at a 3-month high.

Original Trade Description: April 3rd.

Inovio Pharmaceuticals, Inc., a late-stage biotechnology company, focuses on the discovery, development, and commercialization of DNA-based immunotherapies and vaccines to prevent and treat cancers and infectious diseases. Its SynCon immunotherapy design has the ability to break the immune system's tolerance of cancerous cells, as well as is intended to facilitate cross-strain protection against known, as well as new unmatched strains of pathogens, such as influenza. The company is involved in conducting and planning clinical studies of its proprietary SynCon immunotherapies for human papillomavirus-caused pre-cancers and cancers; bladder cancer; glioblastoma multiforme; hepatitis B virus; hepatitis C virus; human immunodeficiency virus; Ebola virus; middle east respiratory syndrome; and Zika virus. Its partners and collaborators include MedImmune, Limited; The Wistar Institute; University of Pennsylvania; GeneOne Life Science Inc.; ApolloBio Corporation; Regeneron Pharmaceuticals, Inc.; Genentech, Inc.; Plumbline Life Sciences, Inc.; Drexel University; National Institute of Allergy and Infectious Diseases; United States Military HIV Research Program; U.S. Army Medical Research Institute of Infectious Diseases; National Institutes of Health; HIV Vaccines Trial Network; Defense Advanced Research Projects Agency; the Parker Institute for Cancer Immunotherapy; and Coalition for Epidemic Preparedness Innovations. Inovio Pharmaceuticals, Inc. was founded in 1979 and is headquartered in Plymouth Meeting, Pennsylvania. Company description from FinViz.com.

Inovio is developing new cancer treatments that deliver coded DNA to cells so they can create their own antibodies against the invading cancer cells. They have multiple trials in progress and the success of any one trial will catapult INO significantly higher.

The drawback is money. They ended the year with $85.5 million after burning through $69 million in 2018. In February they announced a secondary to raise another $82 million. The secondary was convertible notes at $5.38 in 2023. Since that is almost a slam dunk deal, investors trashed the stock because of the 17% dilution in 2023. I think that is very short sighted since we could see three years of stock gains before that comes to pass.

Earnings May 8th.

After crashing to $3.30 on the secondary announcement shares have started to rebound. Wednesday's close was a two-month high. They announced the early closing for enrollment on two different cancer trials. They also announced a new therapy against respiratory tract tumors in a new study. Good things are breaking out all over.

Vipshop Holdings Limited operates as an online discount retailer for various brands in the People's Republic of China. It operates in two segments, Vip.com and Internet Finance Business. The company offers women's apparel, such as casual wear, jeans, dresses, outerwear, swimsuits, lingerie, pajamas, and maternity clothes; men's apparel comprising casual and smart-casual T-shirts, polo shirts, jackets, pants, and underwear; women and men shoes for casual and formal occasions; and accessories that include belts, jewelry, watches, and glasses for women and men. It also provides handbags, which comprise purses, satchels, duffel bags, and wallets; apparel, gears and accessories, furnishings and decor, toys, and games for boys, girls, infants, and toddlers; sports apparel, sports gear, and footwear for tennis, badminton, soccer, and swimming; and consumer electronic products, including computers, mobile handsets, digital cameras, and home appliances. In addition, the company offers skin care and cosmetic products, such as cleansers, lotions, face and body creams, face masks, sunscreen, foundations, lipsticks, eye shadows, and nail polish; and home furnishings comprising bedding and bath products, home decors, dining and tabletop items, and small household appliances. Further, it provides designer apparel, footwear, and accessories; and snacks and health supplements, and occasion-based gifts. Additionally, the company offers Internet finance services, which comprise consumer and supplier financing, and wealth management services. It provides its branded products through its vipshop.com, vip.com, and lefeng.com online platforms, as well as through its cellular phone application. Additionally, the company offers warehousing, logistics, procurement, research and development, consulting, and software development and information technology support services. Vipshop Holdings Limited was founded in 2008 and is headquartered in Guangzhou, the People's Republic of China. Company description from FinViz.com.

Earnings May 22nd.

In late February, the company reported earnings of 19 cents that beat estimates for 18 cents. However, revenue of $3.80 billion missed estimates for $3.96 billion. The 8.1% rise in revenue was down from a 16.4% rise in the prior quarter. The CEO said the weak quarter was the result of the company shifting some low margin categories from the "first-party business" and into the "marketplace platform." He said the move would result in a positive improvement in earnings beginning next quarter. For the current quarter they were only targeting 1-5% revenue growth and analysts were expecting 11.6%. The CEO cautioned that revenue growth was not the metric to worry about. The company is now focused on increasing profits rather than increasing revenue at any cost.

Zacks reiterated a buy rating saying earnings estimates had risen 5.9% over the last 60 days which includes the post earnings commentary. VIPS only has a 9.7 PE compared to 29.4 for the rest of the industry.

After the Zacks comments on the 25th the stock began escalating sharply and closed at an 8-month high on Friday. The stock is now over the 50, 100 and 200 day averages.

Subsidiary AquaBounty (AQB) announced the second public offering in less than 30 days. It did not appear to impact Intrexon despite the dilution.

Original Trade Description: March 13th.

Intrexon Corporation engage in the engineering and industrialization of biology in the United States. The company, through a suite of proprietary and complementary technologies, designs, builds, and regulates gene programs, which are DNA sequences that consist of key genetic components. It provides reproductive technologies and other genetic processes to cattle breeders and producers; biological insect control solutions; technologies for non-browning apple without the use of artificial additives; genetically engineered swine for medical and genetic research; commercial aquaculture products; and preservation and cloning technologies. The company also offers UltraVector platform that enables design and assembly of gene programs that facilitate control over the quality, function, and performance of living cells; and RheoSwitch inducible gene switch that provides quantitative dose-proportionate regulation of the amount and timing of target protein expression. In addition, it provides AttSite Recombinases, which allows stable, targeted gene integration and expression; LEAP automated platform to identify and purify cells of interest, such as antibody expressing cells and stem cells; ActoBiotics platform for targeted in situ expression of proteins and peptides from engineered microbes; and AdenoVerse technology platform for tissue specificity and target selection. The company serves the health, food, energy, and environment markets. Intrexon Corporation has collaboration and license agreements with ZIOPHARM Oncology, Inc.; Ares Trading S.A.; Oragenics, Inc.; Intrexon T1D Partners, LLC; Intrexon Energy Partners, LLC; Intrexon Energy Partners II, LLC; Genopaver, LLC; Fibrocell Science, Inc.; Persea Bio, LLC; OvaXon, LLC; S & I Ophthalmic, LLC; Harvest start-up entities; and others. The company was formerly known as Genomatix Ltd. and changed its name to Intrexon Corporation in 2005. Intrexon Corporation was founded in 1998 and is based in Germantown, Maryland. Company description from FinViz.com.

Intrexon reported a loss of 22 cents that beat estimates for 29 cents. Revenue of $43.2 million declined 44% and missed estimates for $62 million. It was not a good report.

The company's primary revenues come from collaboration and licensing along with some product and service revenues. Collaboration and licensing revenues declined 55% to $25.2 million. These revenues can be very sporadic which means some earnings reports can be ugly. However, the auditor is considering a "going concern" statement in the financials.

The company has $224 million in cash on hand and multiple streams of cash flow from these collaboration and licensing efforts. The CEO said there were multiple efforts underway to develop new revenue streams.

Last week, Bill Miller, of Miller Value Partners, a $2 billion investment fund, tweeted that current efforts underway could make the company worth many multiple of the current stock price. Shares began to rebound from the post earnings beating.

On March 8th, AquaBounty (AQB) a wholly owned subsidiary of XON, received permission from the FDA to import fish eggs from Canada and raise salmon in Indiana. I do not understand what is special about these eggs but shares of AQB spiked sharply.

I am recommending we follow Bill Miller and see if this inexpensive stock can at least return to the pre earnings levels.

Update 3/20: Subsidiary AquaBounty (AQB) priced a secondary offering of 3,345,282 shares at $2.25 per share to raise $7.5 million. This has no impact on XON.

Position 3/14//19:
Long XON shares @ $5.61, see portfolio graphic for stop loss.
Optional: Long July $6 call @ $.95, see portfolio graphic for stop loss.

After the disappointing earnings Bank of America reiterated an underperform (sell) with a price target of $5. However, Telsey Advisory reiterated a market perform and a $10 target. The stock closed at $9.86.

Original Trade Description: March 23rd.

GameStop Corp. operates as a multichannel video game, consumer electronics, and wireless services retailer. It operates in five segments: United States, Canada, Australia, Europe, and Technology Brands. The company sells new and pre-owned video game hardware; video game software; pre-owned and value video games; video game accessories, including controllers, gaming headsets, virtual reality products, memory cards, and other add-ons; and digital products, such as downloadable content, network points cards, prepaid digital and prepaid subscription cards, and digitally downloadable software. It also sells wireless products, services, and accessories; collectibles, such as licensed merchandise primarily related to the video game, television, and movie industries, as well as pop culture themes; gaming-related print media, and mobile and consumer electronics products; PC entertainment software in various genres comprising sports, action, strategy, adventure/role playing, and simulation; and carry strategy guides, magazines, and interactive game figures. In addition, the company operates e-commerce sites under the GameStop, EB Games, Micromania, and ThinkGeek brands; collectibles stores under the Zing Pop Culture and ThinkGeek brands; and Spring Mobile, an authorized AT&T reseller operating AT&T branded wireless retail stores. Further, it provides Game Informer magazine, a print and digital video game publication; and operates Simply Mac, an authorized Apple reseller that sells Apple products, including desktop computers, laptops, tablets and smart phones, and related accessories and other consumer electronics products, as well as training, warranty, and repair services. As of March 28, 2018, the company operated approximately 7,200 stores across 14 countries. It primarily operates its stores under the GameStop, EB Games, and Micromania brands. The company was formerly known as GSC Holdings Corp. GameStop Corp. was founded in 1994 and is headquartered in Grapevine, Texas. Company description from FinViz.com.

Gamestop is headed to the same fate as Blockbuster. Gamestop sells preowned game consoles and video games. With Google announcing Stadia where all games are browser based and run on any device and computing power is not important, this is a major hurdle for Gamestop.

Microsoft announced a similar fate with plans on moving the Xbox to the cloud, called Project XCloud, and there will be no game consoles or game CDs.

With these two giants eliminating the hardware and software that is resold by Gamestop, this company is in a world of trouble. They do sell other products but consumers come into their stores for the games. With 7,200 stores they have a lot of overhead and their biggest revenue items are disappearing.

Granted, this will not happen overnight. These game conversions to the cloud will take months to take hold and many months to become the majority of market share. However, investors will see the future, with Blockbuster a prime example, and Gamestop shares are going to bleed value in the months ahead.

Earnings April 2nd. Normally we would not take a position in front of earnings but there will be analyst questions about the path of progress. The answers may be hard for investors to handle. I am recommending we own a put and hold it over the earnings report.

Update 4/3: Gamestop (GME) reported earnings of $1.60 that matched estimates but was down from $2.02 in the year ago quarter. Revenue declined from $3.32 billion to $3.06 billion and missed estimates for $3.28 billion. Even worse they projected a 5% to 10% decline in revenue in 2019 and losses of up to 5 cents per share in Q1. The company is struggling to adapt to changes in the video game industry.

Microsoft has announced a new Xbox game console that only uses downloaded games. That prevents users from reselling the games to Gamestop on CDs as in the past. Apple and Google also announced new video game offerings that stream games through your browser and the game does not reside on your computer or mobile device. That means no CDs and no consoles needed to play the games. That means no resale opportunities for Gamestop. This is also going to impact the resale value of existing games and consoles. In addition to their woes, Activision Blizzard announced today they were going to release a battle-royale version of Call of Duty that would be free online in the month of April.

Shares fell below $9 at the open but rebounded sharply in what should be a dead cat bounce.

Position 3/25/19:
Long May $10 put @ 65 cents. see portfolio graphic for stop loss.

The investment seeks return linked to the performance of the S&P 500 VIX Short-Term Futures Index TR. The ETN offers exposure to futures contracts of specified maturities on the VIX index and not direct exposure to the VIX index or its spot level. The index is designed to provide investors with exposure to one or more maturities of futures contracts on the CBOE Volatility Index. Company description from FinViz.com.

The VXXB is a short-term volatility ETN based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract, they have to pay a premium and that lowers the price of the ETN. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, the prior VXX ETN had done five 1:4 reverse stock splits. The last five reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16), $12.77 (8/22/17). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

We know from experience that the VXXB and its predecessor the VXX always decline long term.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETN and forget it. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable, I may put a trailing stop loss on it. We will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.

The VXXB will be hard to short. The shares are out there and being traded because the volume on Thursday was 22.1 million. You have to tell your broker you really want to short it and make them find the shares. Sometimes it takes days or even a week before your broker will find you the shares. Trust me, be persistent and it will be worth the effort.

Position 2/1/19:
Short VXXB shares @ $35.33, see portfolio graphic for stop loss.